Tulsidas Kilachand Vs. The
Commissioner of Income-Tax, Bombay City I [1961] INSC 1 (3 January 1961)
03/01/1961 HIDAYATULLAH, M.
HIDAYATULLAH, M.
KAPUR, J.L.
SHAH, J.C.
CITATION: 1961 AIR 1023 1961 SCR (3) 351
CITATOR INFO :
RF 1961 SC1059 (6) RF 1968 SC 189 (13) R 1972
SC 7 (22) R 1981 SC1274 (25)
ACT:
Income Tax-Holder of shares becoming trustee
for the benefit of wife-Liability to tax of such shareholder--"Adequate
consideration", meaning of-Indian Income-tax Act, 1922 (11 of 1922), ss.
16(1)(c), 16(3)(a)(iii), 16(3)(b).
HEADNOTE:
By a deed dated March 5, 1951, the appellant
made a declaration of trust in favour of his wife as follows: "I hereby
declare that I hold 244 shares upon trust to pay the income thereof to my wife
for a period of seven years from the date hereof or her death (whichever event
may be earlier) and I hereby declare that this trust shall not be
revocable". In the year of account, 1951, a sum of Rs. 30,404 was received
as dividend income on those shares and the appellant claimed before the
income-tax authorities that this sum was not liable to be included in his total
income in view of the third proviso to s. 16(1)(c) of the Indian-Income-tax
Act, 1922, but this claim was rejected on the ground that the case was covered
either by s. 16(3)(a)(iii) or by s. 16(3)(b) of the Act. The appellant's
contention was that under the deed of trust there was no transfer of assets
either to the wife or to any person for the benefit of the wife but merely a
creation of a trust in respect of the shares, the dividends from which were
payable to the wife, that even if it be held that there was such a transfer, it
was for adequate consideration being for love and affection which was a good
consideration, and that thus s. 16(3)(a)(iii) or s. 16(3)(b) was not
applicable.
Held, that on a true construction of the deed
dated March 15, 1951, there was a transfer of the shares by the husband to
himself as a trustee for the benefit of the wife and that even though the
husband was the same individual, in his capacity as a trustee he must be
regarded as a person distinct from the transferor.
Held, further, that the words "adequate
consideration" in s. 16(3) of the Indian Income-tax Act, 1922, denoted
consideration other than mere love and affection, which, in the case of a wife,
may be presumed.
Accordingly, the present case fell within s.
16(3)(b) of the Act and not within the third proviso to s. 16(i)(c).
Provat Kumar Mitter v. Commissioner of
'Income-tax, [1961] 3 S.C.R. 37, distinguished.
352
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 134 to 137 of 1959.
Appeals by special leave from the judgment
and order dated September 20,1957, of the Bombay High Court in Income Tax
Reference No. 14 of 1957.
R....J. Kolah, S. N. Andley, J. B.
Dadachanji, Rameshwar Nath and P. L. Vohra, for the appellants.
K....N. Rajagopal Sastri and D. Gupta, for
the respondent.
1961. January 3. The Judgment of the Court
was delivered by HIDAYATULLAH, J. This judgment governs the disposal of Civil
Appeals Nos. 134 to 137 of 1959. They have been filed by four assessees with
special leave, and arise out of similar facts, and it is not necessary to refer
to more than one case to consider the point in question.
The assessment year under consideration is
1952-53, and the previous year, the Calendar year, 1951. In that year, Mr. Tulsidas
Kilachand, one of the four appellants, made a declaration of trust in favour of
his wife, a portion of which may be quoted here:
"........... 1, Tulsidas Kilachand
hereby declare that I hold 244 shares of Kesar Corporation Ltd. and 120 shares
of Kilachand Devchand & Co., Ltd upon trust to pay the income thereof to my
wife Vimla for a period of seven years from the date hereof or her death
(whichever event may be earlier) and I hereby declare that this trust shall not
be revocable." In the year of account, a sum of Rs. 30,404 was received as
dividend income on those shares, and the assessee contended that this income,
after being grossed up, was not liable to be included in his total income, in
view of the third proviso to s. 16(1)(c) of the Indian Income-tax Act. The
Income-tax Officer did not accept this contention, and though the assessment
order is not before us, we gather from the statement of the case that the
reason he gave was that the income had accrued to or had arisen in the hands of
353 Mr. Tulsidas Kilachand and had been paid by him to his wife.
The Income-tax Officer held that the words of
the proviso "income arising to any person by virtue of a settlement or
disposition" did not apply to this income.
On appeal, the Appellate Assistant
Commissioner held that the case was governed by s. 16(3)(b), and need not be
considered under the third proviso. to s. 16(1)(c) of the Act. It appears to
have been conceded before him that if the former provision applied, the proviso
would not save the income from being assessed in the hands of Mr. Tulsidas
Kilachand. The appeal was dismissed.
In the appeal before the Tribunal, Mr.
Tulsidas Kilachand again relied upon the third proviso to s. 16(1)(c), and
contended that the case was riot governed by s. 16(3)(b) and that the dividend
income could not be included in his assessment. The Tribunal came to the
conclusion that the case was covered either by s. 16(3)(a)(iii) or by s. 16(3)(b),
and that the income from the shares was, therefore, liable to be included in
the income of Mr. Tulsidas Kilachand. The Tribunal, however, raised and
referred the following question under s. 66(1) of the Act to the High Court of
Bombay:
"Whether on a true construction of the
deed of declaration of trust dated 5th March , 1951, the net dividend income of
Rs. 30,404 on 120 shares of Kilachand Devchand & Co., Ltd. and 244 shares
of Kesar Corporation Ltd. held under trust by the assessee for the benefit of
his wife was income liable to be included in the total income of the assessee?
The High Court came to the conclusion that, though s. 16(1)(c) was not
satisfied in view of the third proviso, s. 16(3)(b) was applicable to the case,
and answered the question in the affirmative.
In the appeal before us, the case for the
Department was based both on s. 16(3)(a)(iii) and s. 16(3)(b), while the
appellants contended that this disposition fell within the third proviso to s.
16(1)(c). The relevant provisions are:
45 354 " 16. Exemptions and exclusions
in determining the total income.(1) In computing the total income of an
assessee....................................................
(c) all income arising to any person by
virtue of a settlement or disposition whether revocable or not, and whether
effected before or after the commencement of the Indian Income-tax (Amendment)
Act, 1939 (7 of 1939), from assets remaining the property of the settlor or
disponer, shall be deemed to be income of the settlor or disponer, and all
income arising to any person by virtue of a revocable transfer of assets shall
be deemed to be income of the transferor:
Provided....................................................
Provided
further............................................
Provided further that this clause shall not
apply to any income arising to any person by virtue of a settlement or
disposition which is not revocable for a period exceeding six years or during
the lifetime of the person and from which income the settler or disponer
derives no direct or indirect benefit but that the settler shall be liable to
be assessed on the said income as and when the power to revoke arises to him.
(2)..............................................(omitted)
(3)..In computing the total income of any individual for the purpose of
assessment, there shall be included-(a) so much of the income of a wife or
minor child of such individual as arises directly or indirectly(i)......................................................
(ii).....................................................
(iii) from assets transferred directly or
indirectly to the wife by the husband otherwise than for adequate consideration
or in connection with an agreement to live apart; or (b)..so much of the income
of any person or association of persons as arises from assets transferred
otherwise than for adequate consideration to the person or 355 association by
such individual for the benefit of his wife or a minor child or both." The
object of framing s. 16 can almost be taken from the observations of Lord
Macmillan in Chamberlain v. Inland Revenue Commissioners (1), where he stated
as follows:
"This legislation ... (is) designed to
overtake and circumvent a growing tendency on the part of taxpayers to
endeavour to avoid or reduce tax liability by means of settlements. Stated
quite generally, the method consisted in the disposal by the taxpayer of part
of his property in such a way that the income should no longer be receivable by
him, while at the same time he retained certain powers over, or interests in,
the property or its income. The legislature's counter was to declare that the
income of which the taxpayer had thus sought to disembarrass himself should,
notwithstanding, be treated as still his income and taxed in his hands
accordingly." These observations apply also to the section under
consideration, and the Indian provision is enacted with the same intent and for
the same purpose. Section 16 thus lays down certain exemptions and exclusions
in determining the total income of an assessee. Some of the provisions lay down
the conditions for inclusion of certain income, while others lay down the
conditions for exclusion of other income. We are concerned with the income
accruing in case of settlements and the conditions under which income of a wife
is treated as the income of the settlor or disponer or as the income of the
husband. We have to see if the provisions for exclusion or inclusion apply to
this case.
Section 16(1)(c) provides that income from
assets remaining the property of the settlor or disponer or arising to any
person by virtue of a revocable transfer of assets shall be deemed to be the
income of the transferor. What cl. (c) means was decided by this Court in
Provat Kumar Mitter v. Commissioner of Income-tax (2). There, Provat Kumar
Mitter had assigned the dividends only, and had not transferred the relevant
shares. It was held by this Court that this (1) (1943) 25 T. C. 317, 329.
(2) [1960] 3 S.C.R. 37.
356 was a case of application of one's own
income and not assignment of the source from which the income was derived,
which alone saved the income from tax, subject, however, to provisions like s.
16(1)(c) and s. 16(3). The deed in favour of the wife in that case gave only a
right to the dividends, and not being a transfer of an existing property of the
assessee, s. 16(1)(c) and the third proviso were not attracted. That case thus
has no application to the facts of the present case, where the disposition is
differently made.
The disposition here is for a period of seven
years or the life of the settle' whichever is shorter. During that period or
the life of the settlee, Mr. Tulsidas Kilachand has bound himself upon trust to
pay the dividends to his wife and not to revoke the settlement. The intention
is obviously to put this case within the third proviso to s.
16(1)(c), because cl. (c) does not apply to
any income arising to any other person provided the disposer derives no direct
or indirect benefit, even though the assets remain his property. If it were
only a question of the application of the proviso, this disposition would be
exempt. But by the deed of trust, the settlor holds the shares in trust;
the shares do not remain the property of the
settlor.
Section 16(1)(c) has, therefore, no
application, and the proviso is not attracted.
The section goes on to deal with other
situations and to provide for them specially. Sub-section (3) provides
specially for assets transferred to the wife or minor child.
Income from assets transferred to the wife is
still to be included in the total income of the husband, (a) if the assets have
been transferred directly or indirectly to the wife by the husband otherwise
than for adequate consideration [vide sub-s. (3)(a)(iii)], or (b) so much of
the income of any person or association of persons as arises from assets
transferred otherwise than for adequate consideration to the person or
association by such individual for the benefit of his wife [vide sub-s.
(3)(b)].
The first question is whether there can be
said to be transfer of assets to the wife or to 'any person' for the benefit of
the wife. The second question is whether there was adequate consideration for
the transfer, if 357 there was one The contention of the assessee is that there
was no transfer of any assets at all. It is contended that the ownership of
shares involves a bundle of rights, and that they are, generally speaking, (a)
right to vote, (b) right to participate in the distribution of assets on
dissolution, and (c) right to participate in the profits, e. g., dividends
which might be Hi, .declared. It is pointed out that none of these rights was
transferred to the wife, because transfer of assets connotes a creation of a
right in the assets in praesenti. It is urged that there was no transfer of
assets either to the wife or to any person for the benefit of the wife but
merely a creation of a trust in respect of the shares, the dividends from which
were payable to the wife, and that thus s. 16(3)(a)(iii) or s. 16(3)(b) was not
applicable. It is lastly contended that even if it be held that there was such
a transfer, it was for adequate consideration, being for love and affection,
which is a good consideration.
The contention that there was no transfer at
all in this case is not sound. The shares were previously held by Mr. Tulsidas
Kilachand for himself. After the declaration of trust by him, they were held by
him not in his personal capacity but as a trustee. No doubt, under ss. 5 and 6
of the Indian Trusts Act if the declarer of the trust is himself the trustee
also, there is no need that he must transfer the property to himself as
trustee; but the law implies that such a transfer has been made by him, and no
overt act except a declaration of trust is necessary. The capacity of the
declarer of trust and his capacity as trustee are different, and after the
declaration of trust, he holds the assets as a trustee. Under the Transfer of
Property Act, there can be a transfer by a person to himself or to himself and
another person or persons. In our opinion, there was, in this case, a transfer
by Mr. Tulsidas Kilachand to himself as a trustee, though there was no formal
transfer.
The assessee also stresses the words
"any person or association of persons" in s. 16(3)(b), and contends
that such a person must be other than the husband, who transfers.
The word "any person" is wide 358
enough to include the husband, when he transfers property to himself in another
capacity. The change of capacity makes him answer the description "any
person". This deed must be regarded as involving a transfer by the husband
to a trustee, and even though the husband is the same individual, in his
capacity as a trustee he must be regarded as a person distinct from the
transferor. In our opinion, s. 16(3)(b) covers the case.
It remains to consider whether there was
adequate consideration for the transfer. Reliance has been placed only upon
love and affection. The words "adequate consideration" denote
Consideration other than mere love and affection, which, in the case of a wife,
may be presumed.
When the law insists that there should be
"adequate consideration" and not good consideration", it
excludes mere love and affection. They may be good consideration to support a
contract; but adequate consideration to avoid tax is quite a different thing.
To insist on the other meaning is really to say that consideration must only be
looked for, when love and affection cease to exist.
In our opinion, this case falls within the
special rules concerning wife and minor child, laid down in s. 16(3)(b) and not
within the third proviso to s. 16(1)(c). It must thus be held that there was a
transfer of the assets to the husband-trustee for the benefit of the wife, the
answer given by the High Court was thus correct.
The appeals fail, and are dismissed with
costs. One hearing fee.
Appeals dismissed.
Back
